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Cardinal Health is joining forces with CVS Caremark to buy generic drugs worldwide to sell in
the U.S. market, a move that’s expected to add to both companies’ bottom lines and put them on
equal footing with competitors.

Cardinal and Rhode Island-based CVS are contributing their drug-sourcing experts to the evenly
split joint venture, which the partners are calling “the largest generic-sourcing entity” in the
United States.

The venture is expected to add between 25 cents and 30 cents to Dublin-based Cardinal’s annual
earnings per share over time, according to New York investment-research firm ISI Group.

“It’s a huge win for both sides,” said Ross Muken, senior managing director and partner at ISI
Group. “Both have similar aims with their businesses, in terms of creating value for shareholders
and saving costs for the (U.S. health-care) system.”

Wall Street also approved of the announcement, pushing up Cardinal Health’s share price by 3
percent to $66.22 and CVS Caremark’s shares by nearly 2 percent to $67.99 yesterday.

Powerful forces are driving the need for scale and cost-efficiency in the U.S. health-care
system, the largest user of generic drugs in the world, said George Barrett, Cardinal’s CEO and
chairman.

For one, a relentlessly aging population is creating an economic challenge for the nation.

“We now have 10,000 people a day entering Medicare eligibility age,” Barrett said. “We have
(more than) 11 million people over the age of 80 already, and that’s going to double over the next
decade or more.”

Add to that millions of Americans who are gaining access to health-care benefits for the first
time under the Affordable Care Act.

“How do we serve these populations in the most cost-effective manner?” Barrett asked. Using more
generic drugs, which cost far less than name-brand drugs, is one answer.

The Cardinal Health announcement has been widely anticipated since competitors AmerisourceBergen
and McKesson made generic sourcing deals this year. The CVS partnership puts Cardinal Health back
on equal footing, Muken said in a research report.

By combining their generic purchasing activities — likely worth between $12 billion and $14
billion a year — Cardinal and CVS could save between $450 million and $600 million each year,
according to ISI Group.

Muken said, “We view today’s announcement as an unmitigated positive” because the joint venture
lowers Cardinal’s generic-drug acquisition costs and answers investor questions about the company’s
pharmaceutical distribution strategy. It recently lost a $22 billion-a-year contract with Walgreen
and a $9 billion contract with Express Scripts.

Cardinal has committed to pay CVS $25 million per quarter over the course of the 10-year deal.
Why?

“They are considerably larger than we are as a purchaser,” Barrett said. “It was very important
for us to have a 50/50 relationship (in which) we had equitable value sharing. So we sort of trued
up the difference in our size” with the quarterly payments.

Perhaps the greatest challenge for Cardinal and CVS is putting their plan into action by July,
the tentative start date of the venture, Barrett said.